A dispute between fintech startup Synapse and its banking partners has resulted in millions of Americans being unable to access their funds for nearly two weeks. Synapse, backed by Andreessen Horowitz, serves as an intermediary between customer-facing fintech brands and FDIC-backed banks, but disagreements about customer balances led to a bankruptcy declaration in April. This prompted Synapse to cut off access to a technology system that enabled lenders like Evolve Bank & Trust to process transactions, leaving users of fintech services stranded with no access to their funds.
Former partners of Synapse included Mercury, Dave, and Juno, catering to segments like startups, gig workers, and crypto users. With contracts involving 20 banks and 100 fintech companies, Synapse served around 10 million end users according to filings from CEO Sankaet Pathak. While Pathak did not respond to requests for comment, a spokesperson for Evolve Bank & Trust pointed to Synapse’s abrupt shutdown of essential systems without notice, jeopardizing end users’ transactions, balances, and compliance with the law. The reason behind Synapse’s decision to switch off the system remains unclear.
Customers like Chris Buckler and Joseph Dominguez have expressed their desperation and fear over having their funds tied up in fintech accounts due to the Synapse bankruptcy. Dominguez, with over $20,000 locked up in his Yotta account, is concerned about the safety and availability of their funds, as Synapse may be unable to provide necessary documents to verify ownership. This situation shines a light on the vulnerabilities within the banking as a service (BAAS) partnership model and underscores the potential for regulatory oversight gaps given that customers believed their funds were as secure as any other FDIC-insured account.
The BAAS model, used notably by Chime, enables Silicon Valley startups to leverage the capabilities of FDIC-backed banks, enhancing their competition against bigger banking institutions. However, the freeze-up of customer funds exposes the risks associated with this model and the lack of regulatory intervention in cases like Synapse’s dispute with its partners. Consultant Jason Mikula notes that the frozen funds prevent millions of people from making essential payments, highlighting the urgent need for resolution in this case. Despite the severity of the situation, regulators have yet to step in, potentially waiting for underlying banks to fail before taking action to protect customers.
In a plea to the bankruptcy court judge, Chris Buckler emphasized the need for assistance for affected customers, as the federal government has not provided proper support for those impacted by the Synapse debacle. While Buckler acknowledged that he had other resources besides the locked account, he emphasized that many other affected individuals are in far worse financial straits. This case serves as a warning to Americans that while their money may be secure in a bank, it might not be safe if the fintech or processor they are utilizing fails. Buckler’s message underscores the importance of understanding the potential risks associated with fintech services and the importance of regulatory oversight in protecting consumer funds.
